Debate continues over high credit card interchange fees

Let’s get the obvious questions out of the way: What the heck is an interchange fee and why should you care?

Here’s a good somewhat-simplified explanation from Wikipedia:
Interchange fee is a term used in the payment card industry to describe a fee that a merchant’s bank (the “acquiring bank”) pays a customer’s bank (the “issuing bank”) when merchants accept cards using card networks such as Visa and MasterCard for purchases. In a credit card transaction, the card-issuing bank in a payment transaction deducts the interchange fee from the amount it pays the acquiring bank that handles a credit or debit card transaction for a merchant. The acquiring bank then pays the merchant the amount of the transaction minus both the interchange fee and an additional, smaller fee for the acquiring bank.

The moral of the story? It’s money coming out of a retailer’s pocket—approximately 2 percent of each and every transaction’s value. High interchange and other card-processing fees are the reason why my favorite Thai restaurant won’t accept cards for purchases less than $10. The costs of processing the transaction completely erode their profit margin.

I’ve been following the debate swirling around interchange fees for some time now. Here’s a column I wrote about it back in September 2007. But things haven’t quieted down since then. In fact, I’d say the furor has become even more intense.

Check out this story from WOWK, a CBS affiliate in West Virginia. It prompted a small-business owner to leave a comment that most retailers can relate to…

I work in an office of a local drive-train rebuild shop. When we accept a credit card they take 2 percent of the bill right then and once a month they charge a fee just because we accept their card; this all comes to a [loss] of approximately 20 percent of the invoice. We are considering a credit card fee of 20 percent of invoice to offset the charges the credit card companies are charging us. Think about this: 90 percent of our invoices are over $1,000. That means the credit card companies are taking $200 of every $1,000 we invoice.

Progress has recently been made in the European Union to scale back interchange fees. MasterCard Worldwide reached an agreement on April 1 with European competition authorities to reduce credit card interchange fees to 0.30 percent and debit card fees to 0.20 percent, according to the Food Marketing Institute (FMI). This is down from 0.80 to 1.90 percent and 0.40 to 0.75 percent respectively.

Here at home, the House of Representatives plans to vote this week on H.R. 627, the Credit Cardholders’ Bill of Rights. According to FMI, Rep. Peter Welch (D-VT) and Rep. Bill Schuster (R-PA) are going to offer an amendment during debate about the bill to try and address interchange fees. FMI is urging its members to contact their representatives and voice their support for such a measure.

We’ll see how things shake out. I do know this: There are gobs of surveys and studies showing that consumers will be using plastic more often for purchases—big and small. Young Americans, ages 18-25, are more likely to use debit cards than any other payment type. I don’t expect these habits to change. And as more of them begin to frequent your garden center, your cost of doing business is going to go up.

-- Sarah

Comments

[Bob Sickles]

Keep up the good work Sarah! These fees are now at a level that is outrageous and unreasonable considering the amount of transactions now paid with credit cards. The system needs to be more transparent and more competitive for the benefit of all.
Bob Sickles